HSBC Holdings PLC

HSBC Holdings PLC (HSBA) is a London, the United Kingdom-based group, which provides banking and financial services worldwide. It offers various banking products and business operations are spread across Asia, Europe, Middle East, North Africa, North America and Latin America. The company is divided into four segments: Global Private Banking (GPB), Commercial Banking (CMB), Retail Banking & Wealth Management (RBWM), and Global Banking & Markets (GB&M).

Dividend
The company had declared the H1 dividend per ordinary share for the financial year 2019 of US$0.10. The dividend per share was paid on 5^th July 2019 to the holders of record on 17^th May 2019 on Principal Register in the Bermuda Overseas Branch Register or the Hong Kong Overseas Branch Register and the UK.

Financial Highlights (Q1 FY2019 Earnings Update, US$ million)

(Source: Quarterly Update, Company Website)

The company’s reported profit before tax increased by 30.7 per cent to $6,213 million as compared to $4,755 million in 1Q 2018. Adjusted profit before tax surged from $5,800 million in 1Q FY18 to $6,350 million in 1Q FY19. Reported profit after tax was up by 31.4 per cent to $4,910 million against the $3,738 million in the first quarter of the Financial year 2018.

Reported revenue rose by 5 per cent and adjusted revenue climbed by 9 per cent, due to the disposal gains and positive market updates. Adjusted revenue rose by 10 per cent in RBWM and 11 per cent in CMB as compared with 1Q FY18 data. Strong adjusted revenue performances in Retail Banking and Global Liquidity & Cash Management surged by 11 per cent and 17 per cent respectively. The investments stood at $1 billion in 1Q 2019, an increase of 15 per cent as compared with 1Q 2018 data.

Basic and diluted earnings per share increased by 40 per cent to 21 cents as compared with the 1Q 2018 of 15 cents. Returns on average tangible equity surged by 220bps to 10.6 per cent against the 8.4 per cent in 1Q FY18. The net margin decreased from 1.67 per cent in 1Q 2018 to 1.59 per cent in 1Q 2019. Common equity tier 1 ratio surged by 30bps to 14.3 per cent.

Share Price Performance

Daily Chart as at 15^th July 2019, before the market closed (Source: Thomson Reuters)

On 15th July 2019, at the time of writing (before the market close, GMT 10:25 AM), HSBC Holdings PLC shares were quoting at GBX 661.50 and reduced by 0.29 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 736/GBX 596.40. The company’s stock beta was 0.98, reflecting slightly lower volatility against the benchmark index.

Valuation Methodology


Conclusion
The company is planning for the UK’s take-off from the EU to provide continuity for all the clients in the UK and Europe. The company will stay alert to the downside risks to safeguard shareholders interest particularly international trade tensions and the future way of loan costs.

The rising interest rate can help the company to improve its margins but can decrease the demand for loan. The company must remain alert and pursue a proactive approach to managing the cost base. The company will have to remain watchful from political and economic uncertainties around the world. Digital transformation, the emergence of Fintech, growing cards and payments channel in the UK, and expansion initiatives in China may offer new growth opportunities.

Based on the decent fundamental performance and keeping in mind the potential headwinds we have given a “Hold” rating at the closing price of GBX 663.40 (as on 12th July 2019) based on 0.99x NTM Price/Book Value (approx.) on FY19E book value per share (approx.)

British American Tobacco PLC

British American Tobacco PLC (BATS) is a London, United Kingdom-headquartered multinational tobacco and next-generation products company.  The company is one of the world's biggest consumer goods companies and merchandises its products in more than 200 countries worldwide, covering six continents, and was the market leader in more than 50 countries. The four geographical segments are the reportable segments for the company, divided as United States, Europe and North Africa (ENA), Asia-Pacific and Middle East (APME) and Americas and Sub-Saharan Africa (AMSSA).

Dividend
On 28 February 2019, the company’s board had declared an interim dividend of 203 pence per ordinary share was 25 pence, payable in four equal quarterly instalments of 50.75 pence per ordinary share in the month of May 2019, August 2019, November 2019 and February 2020.

H1 FY 2019 Pre?Close Trading Update (as on 12^th June 2019)
The company reported that its share of the cigarette market by volume was down by 10 basis points in the year to date, losing the cigarette market share for the first time in years. While the company said that it was on track for constant currency revenue growth in the upper half of the long-term guidance range, analysts were disappointed as its guidance for first-half revenue growth from its "new category" products was less than 30 per cent.

Financial Highlights (FY 2018, £ million)

(Source: Preliminary Results, Company Website)

The company’s revenue increased by 25.2 per cent in FY 2018 to £24,492 million as compared to the last year with revenue from the strategic portfolio was up by 49 per cent, while adjusted revenue rising by 3.5 per cent to £24,312 million, driven by an increase in total price/mix of 7 per cent and an increase of 3.3 per cent in volume from cigarettes and THP.

Profit from operations rose by 45 per cent in 2018 to £9,313 million, and the operating margin increased over 500 bps to 38 per cent, while the corresponding number on a representative basis increased by 4 per cent to £10,347 million (adjusted profit) and adjusted operating margins were higher by 40bps. Adjusted diluted EPS rose by 5.2 per cent to 296.7 pence.

Adjusted net debt to adjusted EBITDA was 4x, from 5.3x in 2017, and dividend per share increased by 4 per cent to 203 pence.

Share Price Performance

Daily Chart as at 15^th July 2019, before the market closed (Source: Thomson Reuters)

On 15th July 2019, at the time of writing (before the market close, GMT 11:33 AM), British American Tobacco PLC shares were quoting at GBX 2,924.50 and rose by 0.65 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 4,265/GBX 2,249. The company’s stock beta was 1.40, reflecting higher volatility against the benchmark index.

Valuation Methodology


Conclusion
The company stands to benefit from the positive outlook for the global tobacco industry. Product innovations will help the company to gain an advantage over its peers and build brand equity, besides driving overall sales growth. Launch of new products could provide an opportunity for the company to meet the changing tastes of the consumer and serve diverse markets more efficiently.

The company has reported decent revenue growth in FY18, decent business model and significant market share within the tobacco industry across the world. The company intend to consolidate its New Category portfolio into fewer brands as it seeks to create a stronger, simpler business and focus on building global brands. While New Category growth in the second half is expected to be driven by a focus on priority markets and new product launches, Strategic Brands continue to grow. However, the final announcement of the use of e-cigarette and epilepsy is yet to come.

Based on above factors and supported by valuation done using the above method, we have given a “Buy” recommendation at the closing price of GBX 2,905.50 (as on 12th July 2019) with lower double-digit upside potential based on 9.52x NTM Price/ Cash Flow multiple (approx.) on FY19E cash flow per share (approx.).
 
*In valuation Methodology, all USD figures have been converted into GBP; USD: GBP - 0.79632.
*All forecasted figures and peers have been taken from Thomson Reuters.
*The Buy recommendation is also valid at the current price as on July-15-19.

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